Turkish firms ramp up debt-restructuring filings

Event

Following the August currency crisis, there has been an increase in the number of Turkish firms filing for a concordat to restructure their debt in order to avoid bankruptcy.

Analysis

The concordat, a debt-restructuring procedure approved and supervised by a commercial court, has become popular among Turkish firms experiencing financial difficulties to avoid debt-enforcement proceedings. Firms can obtain up to 23 months of debt relief, during which they are expected to implement a debt‑restructuring plan approved by the relevant court. In theory, both the debtor and the creditors are better off as a result of the restructuring, as the parties avoid the bankruptcy.

However, at an economy-wide level, this procedure can have significant adverse consequences. Successive concordats in a given industry can have a negative impact on the entire subcontractor ecosystem that caters to the industry. A high number of concordats may also strain the balance sheets of the banking sector and further limit the liquidity levels in the banking system. Finally, firms that are allegedly connected to the ruling Justice and Development Party (AKP) may benefit disproportionately from court approvals to postpone their debt payments, and their creditors suffer from potentially uneven cash flows.

Several established firms have filed for a concordat in the past few months. The total number of approved concordat requests is unknown, but it may be estimated to be between 500 and 3,000. Formal concordat requests came in addition to informal negotiations between banks and companies, details of which often remain private. Owing to a sharp increase in formal and informal debt‑restructuring requests since late August, in September a majority of Turkish financial institutions reached an agreement on a loan‑restructuring framework. On October 8th the Banks Association of Turkey (TBB) presented a new loan-restructuring recommendation, advising lenders to restructure debts of up to a TL15m (US$2.7m) with a six‑month non-payment period. According to the TBB, around one‑quarter of all outstanding loans by Turkish banks could be restructured under its new recommendation.

Impact on the forecast

We so far maintain our real GDP growth estimate of 3.1% in 2018 and our forecast of 1% in 2019. There are sizeable downside risks to this forecast, however, the materialisation of which will in part depend on the ability of the private sector to continue to service its debt.